Detroit officially filed for bankruptcy yesterday making it the largest municipal bankruptcy in American history. At its peak in 1950 Detroit had 2 million people, which has dwindled to around 700,000 according to the last census.
Due to decreasing population, rising unemployment rate and prodigious benefits that go well into the future. Detroit ran out of cash and ran out of means for borrowing more money. Why would you care? Never been there? Never care to go there? There are 2 reasons why this bankruptcy could be of importance to you.
First of all, if you own any municipal bonds you need to take note because local governments have been declaring bankruptcy at dramatically increasing pace. Chapter 9 bankruptcies in this country have averaged about 1 per year for cities and counties, since the mid 1950's. Over the last 2 years that has jumped to 12 and 13 per year, with Detroit now being the largest by far. Detroit has approximately $18-20 billion in current and future obligations that they won't be able to meet. The bond holders are likely to get pennies on the dollar for their bonds.
Secondly, if you worked for and thus receive or plan to receive a pension from a local municipality (county or city) than you should also take note. The pensioners who dedicated decades of work to Detroit will most likely lose all or a large chunk of their benefits. This is money that they count on to live and it will permanently disrupt their lives. If they receive other forms of income they will have to make do or get another job. This is a sad state of affairs, but it reconfirms my belief that pensions are great, but under no circumstance should they be counted on during retirement. Retirement takes a long time to accomplish, so relying on somebody else to live up to their end of the bargain is too risky.
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